HONG KONG (Dow Jones)--The Hong Kong government has issued a new proposal on exempting offshore funds from paying profits tax in a bid to maintain the territory's status as an international financial center.
The new proposal, crafted by the Financial Services and the Treasury Bureau, seeks to exempt non-Hong Kong residents from paying profits tax on income derived from the trading of local securities by offshore funds.
Offshore funds are domiciled outside Hong Kong, in places such as the Cayman Islands, the British Virgin Islands and Mauritius, but the funds can be managed in Hong Kong and invest in local securities.
The key difference between the current proposal, issued late Tuesday, and previous proposals already discussed with fund industry professionals is the absence of a requirement for brokers and investment advisers to keep records that verify the non-resident status of each investor in offshore funds.
Sally Wong, executive director of the Hong Kong Investment Funds Association, said requiring offshore funds to keep records of the resident status of all their investors "poses huge practical difficulties, if not impossible to comply with."
Last month, Secretary for Financial Services and the Treasury Frederick Ma said he hoped legislation for the profits tax exemption of offshore funds could be introduced during the current Legislative Council session, which ends in July.
The government said in its 2003-04 budget that it would exempt offshore funds from paying profits tax.
The move followed criticism Hong Kong's tax policy on offshore funds' investments in local securities lacked clarity. Several international fund managers said they were considering focusing on making offshore funds available to institutional clients and private banking clients in Singapore, where they would be exempt from profits tax.
Many offshore-fund managers had operated in Hong Kong believing they were exempt from paying any taxes.
However, under Hong Kong's Internal Revenue Ordinance, offshore funds are required to pay taxes on profits gained from any local exposure to stocks and bonds. Assessable profits are taxed at a rate of 17.5% in Hong Kong, according to PricewaterhouseCoopers.
The government unnerved offshore-fund managers in mid-2000 when, searching for new revenue streams, it started issuing them tax returns, requiring the payment of taxes on profits reaped from trading local stocks and bonds.
Many offshore-fund managers sent back the returns with notes saying they believed they were exempt from paying taxes.
Funds that are authorized by Hong Kong's Securities and Futures Commission are exempt from paying profits tax. Only SFC-authorized funds can be marketed to retail investors.
Source: Yahoo Finance Singapore
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